It’s a universal claim that most political manifestos fight to halt or subdue the flow of wealth from the bottom to the top while promoting the advancement of humanity. Despite the application of much cognitive capacity and interminable political speeches the rich continue to become richer while the poor get poorer.
This concept was dubbed ‘The Matthew Principle’, coming from the Bible’s book of Matthew [25:29] when Jesus told his disciples,
For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.It is likely this principle spread throughout societies for millennia before the New Testament era. Anthropologist David Graeber’s book Debt, The First 5,000 Years (p.214 onwards) supports this view.
Misconceptions and ignorance appear to play a major role in the apparent political impotence on conquering inequality. A large majority of politicians and economists, in a position to influence policy, seem to perceive the economy through an unnecessarily narrow frame.
Viable options are outside this frame of reference and rendered invisible
Taxation is the main weapon in the economic arsenal to control the distribution of resources. In modern times—the last five decades or so—low tax policies have dominated, irrespective of the governing party. During this time people in the highest tax bracket had their wealth reduced by less than half of that lost to HMRC in the post war period. With the rich retaining wealth, to balance the economy one would think that governments would want to increase spending at the margins to improve the living standards of those at the bottom.
Politicians, advised by orthodox economists have an aversion to government spending without the balancing effect of taxation. The ideal, to this school of thought, is a balanced budget. It is easy to understand why the politicians believe this to be the case. Their understanding of business or household economics is the idea that spending is constrained by income. This is rational. There are no such excuses for economists.
There is no monetary limit to government spending
The reality is that a balance between government spending and taxation, in an economy like the UK’s, causes a downward spiral of living standards of the most vulnerable in society. The missing link is the fact that the government is the monopoly issuer of the national currency. Without comprehending this it is easy to see why some politicians find the Matthew Principle so hard to counteract.
In the non-government sector the situation is very different. No private sector actor can add to the net financial assets of the private sector. It may appear that commercial banks create money when authorising loans or mortgages, however, each additional deposit of funds is counter-balanced by the liability of the repayment agreement.
The mindfulness and swirling pitfalls of economic vortices
People are both buyers and sellers, constantly selling their labour, skills, or resources to earn the money required to spend to cover their cost of living and necessities of life. At each transaction in the private sector some tax is removed from the economy and destroyed, while some profit is also made. Profit behaves in a very different manner to the taxed or earned money. It may appear that profit creates money out of thin air; a form of alchemy. This is not the case. Profit is a redistribution of the fixed money supply.
Take the idea of a whirlwind with the population scattered through the various tiers of the vortex. The flow of transactions sweeps the money supply around, drawing it ever inwards. Tax extracts money from the vortex throughout the various tiers and wages tend to draw money against the flow, while profit relentlessly presses towards the centre. It should be obvious that matching government spending by taxing and borrowing is a flawed concept. Those at the outer rim of the vortex, are persistently impoverished while wealth is accumulated by a small group at the core. Government spending is required to replenish the supply of money for the most vulnerable in society on the fringes.
Government spending alone will not solve inequality
Spending must be targeted to those in need. The UK currently runs a sizeable deficit but the wealthy continue to thrive while poverty increases. The way the government ‘offsets’ this net spending reveals a reason for the persistence of the Matthew Principle.
At present the UK Government has a completely unnecessary policy of balancing all deficit spending with the sale of gilts to that value. Gilts are UK Government bonds sold to “borrow” back some of the money government had already spent into the economy, when pounds sterling were convertible to gold. Those days are long gone and bonds are now a policy choice used to manage debt and liquidity, and support the policy interest rate. However bonds do play a lead role in the Matthew Principle.
Gilts are interest-bearing forms of money, slightly less liquid than a cash deposit, but still relatively easy to transfer into cash, if required. This interest portion is a form of government deficit spending. It is money government spends into the vortex and it is targeted. However these interest payments are targeted at the very centre of the vortex. This money goes to the already wealthy in direct proportion to how much wealth is held.
In 2022 UK Government debt interest payments totalled £111bn.
The deficit for 2022 was £137bn. Therefore only £26bn of net government spending found its way into the wider economy. Institutions like pension funds and insurance companies invest in gilts, so there is a pathway for a percentage of the spending to find its way into the main economy.
The sad fact is, this system of paying wealthy people for having money only perpetuates and exacerbates the Matthew Principle.
Just as poverty is a sign of a dysfunctional economy so too are billionaires
If we are serious about defeating inequality, areas of economic policy must be amended. By introducing a fixed interest rate—at zero or just above—then bond issuance becomes obsolete and can be stopped. Over time interest payments should fall to zero as the gilts are paid off. This was laid out in the paper The Natural Rate of Interest Is Zero by Forstater and Mosler (2005),
Orthodox economists could argue that manipulation of interest rates is the government’s main tool for inflation control. The reality is that there are as many ‘tools’ for inflation control as there are numerous reasons for inflation. The policies with most influence in conquering inequality would be a job guarantee scheme, as described in A Case for a Job Guarantee by Pavlina Tcherneva. Also an increase in state pension to a rate that would provide reassurance, security, and comfort.
Government spending would be targeted to the precise areas of need in the economy and over time should reduce the width of the vortex, and with it the distance between the privileged and the most vulnerable.
The Matthew principle is society’s canary in the coal mine. When the effect is obvious then society is in danger of breaking down. Instead of complacently ignoring the growing inequality in the UK, it may be worth questioning whether the public should allow our politicians to encourage the population to act like hedonistic teenagers, or whether it is time to shoulder some responsibility and seek a bit of maturity.
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